After the plunge yesterday, there was some hope that maybe things had become negative enough to wash out the sellers and produce a bounce. There was a very small bounce in the first 15 minutes of trading, but that fizzled fast and the market remained under pressure the rest of the day.
What was notable today was that sellers went after the big-cap momentum names that have been holding up relatively well. Twitter (TWTR), Palo Alto Networks (PANW) and Tesla (TSLA) are good examples. In a bear market they eventually go after almost everything, and there is no doubt that the average stock already is in a bear market, although the indices may not be. A good example of the deception of the indices continues to be the DJIA, which suffered minor losses compared with the Nasdaq, which took a hit of more than 2%.
The most worrisome thing about the action today is that a couple of minor bounce attempts were quickly turned back and the indices ended up closing at the lows. There is obviously a lot of fear, but there is no reason to believe that it is great enough that there still isn't plenty of supply for sale.
I've talked about a change in market character a couple of times this year, but we have really undergone a major shift this past week. Key resistance levels like the 200-day simple moving average are starting to fall, and we are seeing the level of new 12-month lows really jump.
This is classic corrective action, and no one should be too surprised that it is occurring. I don't think anyone can seriously disagree with the statement that the market has gone up too far, too fast over the last couple of years. To make it even worse, we never really had the economic improvement to justify it.
It doesn't matter what the reasons are for this action. The important thing is to stay defensive and protect capital. We really don't have any clue as to how deep this selloff will go. Just respect the fact that the trend is down. There is no need to buy when the market is acting this way.
Have a great weekend. I'll see you on Monday.
Oct. 10, 2014 | 10:19 AM EDT
The Dip Buyers Take a Powder
- They're all flippers now.
There was sufficient negativity this morning for a bit of a bounce, but the dip buyers were too nervous to stick around. They are all flippers now with short-term time frames. In addition, a very large contingent of trapped bulls is worried that this correction is different and the market isn't going to come back so quickly or easily. They are looking for ways to reduce exposure into strength and are making it tougher for a sustained bounce to grow.
Breadth is actually decent at about 2,400 gainer to 2,750 decliners. My momentum list is about 40% green but there isn't any quality leadership. The best trading action is in Ebola-related stocks such as Lakeland Industries (LAKE), Alpha Pro Tech (APT), Ocean Bio-Chem (OBCI), Sharps Compliance (SMED) and a couple of others. I'm completely out of APT, which I mentioned Tuesday.
There isn't much to do on the long side unless you are playing extremely fast bounces. Stocks are still breaking down technically and have not yet found good support. I'm still optimist that we are going to have great opportunities soon, but it is all about the timing.
Buyers are looking for safety, which is helping to hold up Apple (AAPL), Nike (NKE), Chipotle (CMG), Microsoft (MSFT) and a few others that have lower betas and are considered decent values. Big-caps like these will be the leaders as the market turns back up, but they aren't likely to do much in the near term.
Oct. 10, 2014 | 7:16 AM EDT
Protect Your Capital for Now
- Savvy traders protect against losses and bide their time.
The enlightened ruler is heedful, and the good general full of caution. --Sun Tzu
The biggest gain of the year on Wednesday was followed by an even bigger loss on Thursday. This massive bounce failure is creating some shrill headlines, as worry builds that we are finally going to undergo a correction that is long overdue.
What is most worrisome about this action is that it has been so long since we've had any significant correction. They are inevitable. This chart illustrates how much potential downside there may be if the selling momentum picks up steam.
Some bulls are already telling us that we have already sold off sufficiently and are ready to bounce back. While that certainly is possible, there is just too much risk right now to be sanguine about market prospects.
We have seen a remarkably steady uptrend for nearly two years and the volatility of the past week is a clear signal that something is changing. Volatility of the magnitude we've had recently tells us that emotions are running high and that the level of uncertainty is building. When people are feeling uncertain they don't put more money at risk and buy. They stay away and seek out safety in the form of cash.
What adds to the severity of the action, like yesterday, is that so many market players have grown used to the V-shaped bounces. It has been downright foolish, and very costly, to be defensive when the market has a bad day or two. Inevitable the central bankers would say or do something to prop up the market and we'd go straight back up.
What has changed this time is that the market is losing confidence in the central bankers. The Fed is still sending mixed messages about keeping rates low for a substantial period of time, and it appears to be clear that rates will go up despite the slow economic progress.
Things in Europe are far worse. There is great concern that the economy is falling back into recession and the ECB is running out of ways to deal with it, since interest rates are already negative in some cases.
The market still loves the central bankers, as we saw on Wednesday, but they are losing their power to be the positive catalyst that they have been for so long.
The key thing to do right now is to not worry about market predictions but to take action to protect your capital in case this correction goes deeper. There are going to be plenty of folks trying to predict when we will turn back up. The media will have plenty of pundits telling you it is time to jump back in so you don't miss out. It is far more important that you avoid losses in case this action continues. You can always get back in, but if you allow losses to build, you have to do some hard work to recoup.
The easiest way to outperform the market isn't to produce exceptional gains in an uptrend. The easiest way to outperform is to avoid losses in a downtrend. That is what savvy traders are doing right now. They don't worry about catching a turn. They focus on protecting capital so they can be aggressive when things improve.
We have a poor open on the way. Stay safe.